FINA2201

Three areas of finance

- Corporate finance (borrowers) - Financial Markets & Institutions (intermediaries) - Investment (savers)

operating activity

Activity that creates cash inflows or outflows through day-to-day operations.

financing activity

Activity that creates cash inflows or outflows through the obtaining or repaying of borrowed or invested funds.

Sole proprietorship advantages and disadvantages

Adv: easiest to start, least regulated, single owner keeps all profits, taxed once as personal income Dis: Limited life to owner, equity capital limited to owner's personal wealth, unlimited liability, difficult to sell ownership interest

corporation

Advantages: limited liability, unlimited life, separation of ownership & management, transfer of ownership is easy, easier to raise capital Dis: double taxation (dividends @ personal, income @ corporate)

Which one of the following terms is defined as a conflict of interest between the corporate shareholders and the corporate managers?

Agency Problem

Which of the following help convince managers to work in the best interest of the stockholders? Assume there are no golden parachutes. I. Compensation based on the value of the stock. II. Stock option plans. III. Threat of a company takeover. IV. Threat of a proxy fight.

All

Highest paid CFO 2014

Anthony Noto (Twitter) (most of his income is from stock)

Corporation Organization Chart

Board of directors --> CEO, COO, CFO

What are the three main concerns of corporate finance

Capital Budgeting, Capital Structure, working capital management

Which one of the following business types is best suited to raising large amounts of capital?

Corporation

Which one of the following actions by a financial manager is most apt to create an agency problem? A) Refusing to borrow money when doing so will create losses for the firm B) Refusing to lower selling prices if doing so will reduce the net profits C) Refusing to expand the company if doing so will lower the value of the equity D) Agreeing to pay bonuses based on the market value of the company's stock rather than on its level of sales E) Increasing current profits when doing so lowers the value of the company's equity

E) Increasing current profits when doing so lowers the value of the company's equity

Which of the following are advantages of the corporate form of business ownership? I. Limited liability for firm debt. II. Double taxation. III. Ability to raise capital. IV. Unlimited firm life.

I, III, and IV only.

Which of the following questions are addressed by financial managers? I. How should a product be marketed? II. Should customers be given 30 or 45 days to pay for their credit purchases?III. Should the firm borrow more money? IV. Should the firm acquire new equipment?

II, III, and IV only.

Which one of the following best states the primary goal of financial management?

Maximize the current value per share.

Which one of the following is a primary market transaction? 1) Sale of currently outstanding stock by a dealer to an individual investor 2) Sale of a new share of stock to an individual investor 3) Stock ownership transfer from one shareholder to another shareholder 4) Gift of stock from one shareholder to another shareholder 5) Gift of stock by a shareholder to a family member

Sale of a new share of stock to an individual investor

Which one of the following parties has ultimate control of a corporation?

Shareholders

Which of the following individuals have unlimited liability based on their ownership interest? I. General partner II. Sole proprietor III. Stockholder IV. Limited partner

Sole Proprietor and General Partner

Which one of the following statements is correct? A) A general partnership is a legal person. B) Taxable income earned by a partnership is treated as individual income C) Partnerships are the most complicated type of business to form. D) All partnerships are required to have at least one limited partner. E) Only firms organized as partnerships have limited lives.

Taxable income earned by a partnership is treated as individual income

What is capital budgeting

What long-term investments or projects should the business take on? (should we go to college and where)

MGMT primary goal Stakeholder theory

a company's goal is not solely to chase maximum profit, rather serve a social purpose

Accrual rather than cash accounting

accrual accounting recognizes revenues (expenses) as earned (recognized) when sales (expenses) are transacted (incurred) regardless of the actual date of payment

Investment Activity

actions taken to maximize the production of future income

Partnership

adv: 2+ owners, more capital available, relatively easy to start, income taxed once as personal income dis: unlimited liability (g partner) partnership dissolves when one dies or wishes to sell, difficult to transfer ownership

General partnership

all partners share in gains & losses, all have unlimited liability

What are the three basic finance statements?

balance sheet, income statement, cash flow statement

Limited Liability Partnership

can't help in running the business, otherwise could be deemed genera

what is net working capital

cash available to the firm to meet day to day and unexpected expenses. calculate by current assents-current liabilities.

Three sections of cash flow statement

cash flow from operating activities, cash flow from investing activities, cash flow from financing activities

A business that is a legal entity separate from the owners, yet treated as a legal person, is called a(n):

corporation

Which one of the following statements regarding corporations is correct? A) The majority of firms in the U.S. are structured as corporations. B) Undistributed corporate profits are taxable income to the shareholders. C) Corporations can have an unlimited life. D) Shareholders are protected from all potential losses. E) Shareholders directly elect the chief financial officer.

corporations can have an unlimited life

net working capital

current assets - current liabilities

define liquidity

ease of conversion to cash without significant loss of value

Other stakeholders

hedge fund activists. Large hedge funds that accumulate sizable stake in public firm

Working capital management

how should the firm manage its everyday financial activities? (spend or save and how much in all categories)

Current ratio

if we liquidate CA can we cover short term debt?

on a balance sheet assets are listed

in order of decreasing liquidity

Managing managers

incentives around performance, threat of takeover, we can have other stakeholders/creditors to have claim on cash flow or profit

The goal of financial management in a for-profit business is to

make decisions that increase the value of the stock or more generally increase the market value of the equity

Agency problem

management decisions do not agree with ownership decisions

Financial markets

play an extremely important role in finance

A balance sheet

provides a snapshot of a firm's financial position at one point in time

Quick ratio

same as current, but when more illiquid

three types of business

sole proprietorship, partnership, corporation

What is the superior form of organization?

the corporate form, but has the disadvantage of double taxation

What is finance?

the process of transferring money from savers to borrowers through financial markets or institutions

on the liabilities side how do we list items?

urgency (how long you have to change each one)

What is capital structure

where will the firm get its long-term financing to pay for its investments? What mixture of debt and equity should the firm use to fund operations? (blend of debt & equity to get through school)